POSTSCRIPT TO THE SURVEY OF RECENT DEVELOPMENTS - ON CAUSES AND CURESFOR THE RUPIAH CRISIS

The dramatic fall of the rupiah has been driven largely by panic, rath er than by careful analysis of Indonesia's economic fundamentals. The catalyst for the panic appears to have been a sudden reassessment of t he exchange rate risk faced by unhedged domestic firms and foreign inv estors. This reassessment was triggered by the abrupt decision of the Thai government to float the baht. The policy focus now must be on hel ping the private sector adjust to the floating rate environment, and a iming to maintain economic growth. Belt-tightening measures are counte rproductive in these circumstances. The process of adjustment might be assisted by a clearly articulated decision by the government for Bank Indonesia (BI) to divest itself rapidly of a large portion of its for eign exchange assets, given that its need for them is greatly diminish ed in a genuinely floating regime.